Former Federal Reserve economist Claudia Sahm views a rate hike as the “appropriate policy” for the Fed’s meeting next week, as she is “no longer confident” inflation will return to 2% without it.
Case For a Hike
“Hike or hold? That is the question when the Fed meets next week. Going in, it’s clear that Fed officials are divided on the answer,” Sahm said in a Substack post published Monday.
She added that she was “no longer confident” inflation would return to the Fed’s 2% target in the next year or two without the central bank raising rates.
“I view a modest increase in the funds rate, starting with a quarter point in September and maybe 50 or 75 basis points higher in total by the end of the year,” the economist, best known for creating the “Sahm Rule” recession indicator, said.
CME Group data shows traders currently assign a 58.4% probability to a rate hike, with the remaining 41.6% expecting the Fed to hold steady.
Energy and Tariffs Are Adding to the Risk
A 10% rise in gasoline prices typically adds about 0.2 percentage points to core inflation over the following year, Sahm said, warning that the effect grows the longer prices remain elevated amid the stalled conflict in the Middle East, with gasoline already at a record Labor Day level.
Canada’s retaliatory tariffs raise a similar concern, Sahm said, proving “the president is not done using tariffs as a negotiating tool” even as officials expected last year’s tariff effects to fade.
AI Poses a Different Kind of Risk
With hyperscaler capital spending expected to top $1 trillion next year, the economist said memory chip shortages stem from real, lasting demand, not a passing supply hiccup, and argued the Fed shouldn’t give AI-driven price pressure the same pass it gives energy or tariff shocks.
A Divided Fed Heads Into Next Week
The August Consumer Price Index (CPI) report is scheduled for Friday, and the Fed will announce its rate decision on Sept. 16.
The central bank held rates steady at its July meeting, but three policymakers dissented, calling for a hike.
“Whatever the Fed decides next week, hike or hold, we deserve a good explanation,” Sahm wrote. If most officials still believe inflation is heading back to 2% soon, she said she wants to hear it, if not, she said it’s “time to take action to restore that confidence.”
Price Action: The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) closed 0.17% higher on Friday at $82.21 and fell 0.4% in early pre-market trading on Tuesday. The iShares 7-10 Year Treasury Bond ETF (NASDAQ:IEF) closed 0.03% lower on Friday at $92.25 and rose 0.27% in early pre-market trading on Tuesday.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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